Research

Research Interests: OTC Markets, Liquidity, Market Microstructure

Working Papers:

[1] Trading Relationships in Over-the-Counter Markets

Abstract: This paper formalizes a decentralized asset market where investors form long-term trading relationships with dealers. Relationships influence the provision and price of liquidity by alleviating search frictions and mitigating a holdup problem. Intermediation fees depend on both the current gains from trade and the future value of the relationship, creating a temporal dimension that leads to nonmonotonicities in transaction costs as trade sizes or relationship duration vary. When relationship duration is endogenized, investors with the strongest insurance motives establish the longest relationships. This feature of the model links stronger relationships with higher trading volume and tighter spreads.

[2] Request-for-Quote Protocols

Abstract: This paper studies a model of an OTC market where investors have access to a technology that allows them to request prices from multiple dealers simultaneously. When investors receive an opportunity to trade, they demand a divisible quantity of assets from multiple dealers, each of whom compete for the trade by quoting a fee. In equilibrium, there exists a distribution of bid-ask spreads for investors sharing identical characteristics. Larger meeting sizes prompts investors to endogenously trade in larger quantities which increases trading volume and decreases transaction costs. Endogenizing the response decision of dealers, I find that larger meeting sizes do not correspond to lower fees. If too much competition exists between dealers, any one given dealer will choose to respond with lower probability. This strategic behavior increases transaction costs and also leads to an empirically relevant trade size discount. When investors have control over the size of the meeting, they endogenously choose to contact a finite number of dealers even though there is no direct cost of order exposure.